Question

P 7–1 Uncollectible accounts; allowance method; income statement and balance sheet approach L07-5, 407-6 Swathmore Clothing Corporation grants its customers 30 days' credit. The company uses the allowance method for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by multiplying 3% times the amount of credit sales for the month. At the fiscal year-end of December 31, an aging of accounts receivable schedule is prepared and the allowance for uncollectible accounts is adjusted accordingly. At the end of 2020, accounts receivable were $574,000 and the allowance account had a credit balance of $54,000. Accounts receivable activity for 2021 was as follows: Beginning balance 574,000 Credit sales 2,620,000 Collections (2,483,000) Write-offs (68,000) Ending balance 643,000 The company's controller prepared the following aging summary of year-end accounts receivable: Summary Age Group Amount Percent Uncollectible 0-60 days $430,000 4% 61-90 days 98,000 15 91-120 days 60,000 25 Over 120 days 55,000 40 Total $643,000 Required: 1. Prepare a summary journal entry to record the monthly bad debt accrual and the write-offs during the year. 2. Prepare the necessary year-end adjusting entry for bad debt expense. 3. What is total bad debt expense for 2021? How would accounts receivable appear in the 2021 balance sheet?

Answer 1

Solution 1:
Journal Entry 1 - Swathmore clothing corporation
Event	Particulars	Debit	Credit
1	Bad debts expense Dr ($2,620,000*3%/12)	$6,550.00
	To Allowance for uncollectible accounts		$6,550.00
	(To record monthly accrual for bad debts)
2	Allowance for uncollectible accounts Dr	$68,000.00
	To Accounts receivables		$68,000.00
	(To written of accounts receivables)

Solution 2:
Computation of Allowance for Uncollectible Accounts
Ageing	Accounts Receivables	% Uncollectible	Required Allowance
0-60 days	$430,000.00	4%	$17,200.00
61-90 days	$98,000.00	15%	$14,700.00
91-120 days	$60,000.00	25%	$15,000.00
Over 120 days	$55,000.00	40%	$22,000.00
Total	$643,000.00		$68,900.00

Journal Entry 2 - Swathmore clothing corporation
Event	Particulars	Debit	Credit
1	Bad debts Expense Dr [$68,900 - ($54,000 + $78,600 - $68,000)]	$4,300.00
	To Allowance for doubtful accounts		$4,300.00
	(To record bad debts expense)

Solution 3a:
total bad debt expense for 2021 = $78,600 + $4,300 = $82,900
Solution 3b:
Balance Sheet
Current Assets:
Accounts receivables, net ($643,000 - $68,900)	$574,100.00